by Alex Hanson | January 31, 2012 1:19 pm
Casino operator Las Vegas Sands (NYSE:LVS) will report fourth-quarter financial results after the bell Wednesday. Analysts are expecting earnings per share of 57 cents, which is 15 cents (or 35%) higher than year-ago results. What’s more, earlier this week an analyst with Barclays (NYSE:BCS) opined that LVS and other gaming companies should beat fourth-quarter estimates amid a better revenue environment. LVS has managed an upside earnings surprise in three of the past four quarters.
Other analysts are notably bullish on LVS, according to data from Zacks. Of the 20 analysts rating the stock, 17 have rated it a strong buy or buy, leaving just three hold ratings and no sells to speak of. While the vote of confidence might make some LVS investors feel at ease, it also means the possibility of future downgrades looms, especially if earnings don’t go according to best estimates.
In terms of the stock’s price action, LVS is approaching a 52-week high after powering 15% higher in 2012. Looking back 12 months, however, the stock is relatively flat — up just 8%.
Click to Enlarge The stock is now closing in on the $50 area, which has been a site of resistance for Las Vegas Sands going back more than a year. LVS might find this round-number level hard to overtake once again. A move through this point, on the other hand, could encourage some buying power from the sidelines.
On the options front, investors are looking for a quick downside move — very quick. In Monday’s trading, the 48-strike put was active among the February 3 weekly options series. Rapidly growing in popularity, weekly options are being used among investors who are hoping to capitalize on a short-term event (such as earnings).
More than 12,000 contracts traded at this strike during the day. Open interest was relatively nonexistent on this option heading into Monday’s session, indicating the positions were being traded to open. A couple of large blocks traded at or near an average ask price of $1.28, suggesting they were executed on the buy side.
Put buyers risk up to 100% of the premium paid, if LVS is trading above the 48 strike when these options expire in a few days. Below the breakeven price of $46.72 (strike price less the premium paid), gains are theoretically unlimited down to zero.
One thing to be cognizant of when buying options around earnings is the propensity for volatility to collapse once earnings are released. With uncertainty out of the way, the fear of a sharp move gets sucked right out of a stock. As a result, the value of options might decline even if the stock moves in the expected direction. Stock price is only one of six variables that comprise an option’s value, and volatility is the other factor that can be rather unpredictable.
Therefore, the puts purchased yesterday could decline in value (or stay flat), even if LVS shares pull back after earnings are released. The added layer of time decay (very rapid for weekly options) builds pressure as well.
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